The Companies and Intellectual Property Commission (CIPC) has issued a second compliance notice to the Nova Property Group that may lead to the shutdown of the company’s current operations.
This comes after Nova, in its response to a compliance notice issued by the commission in February, failed to convince the CIPC that it is not trading recklessly or insolvently.
This development will affect the 18 700 former Sharemax investors who invested around R4.6 billion in its various property syndication schemes.
Nova was specifically set up to repay the investors from next year, but Nova’s current precarious financial position makes this highly unlikely. It is not clear what the impact of the CIPC intervention will be on debenture holders.
If the CIPC takes further action it may effectively result in Nova being put under administration, into business rescue or even into liquidation.
In all three of these scenarios, the court will appoint an official to take control of the company from the directors and be tasked to repay creditors, including debenture holders.
Nova’s precarious financial position
The CIPC’s actions follow a significant deterioration of Nova’s financial position over the past few years. Nova received three consecutive qualified audits for its 2018, 2019 and 2020 financial years. For each of these three years, the auditors also questioned whether Nova could continue to operate as a going concern.
During these periods, the company also sold numerous properties and used the proceeds to partly finance operational costs, including lavish salaries for the directors.
(Moneyweb calculations show that Nova has sold more than half of the investment properties it inherited from Sharemax, for around R576 million, while repaying only R176 million to debenture holders. At the end of February last year, Nova only had R5 million cash in the bank.)
There were also several corporate governance failings and contraventions of the Companies Act.
Nova did not publish its annual financial statements (AFS) for the three financial periods within six months after its year-end, which is a contravention of the Companies Act. Nova has also not published its AFS for its most recent 2021 financial year, which was due at the end of August.
The CIPC first stepped in in February this year by issuing Nova with a form CoR 19.1, a notice showing cause regarding reckless trading or trading under insolvent circumstances. This was issued to compel Nova to prove to the CIPC that it was not trading recklessly, negligently, fraudulently, or under insolvent circumstances.
Nova responded to the notice and submitted documentation to the CIPC. At the time, Dominique Haese, Nova’s CEO, denied that Nova was insolvent and said in response to Moneyweb questions: “The Group [Nova] is and has always been solvent and liquid. The CIPC has received the latest AFS [for its 2020 financial year] supporting this. The CIPC Notice has been comprehensively and adequately dealt with.” (Haese’s complete response to Moneyweb’s questions can be seen here.)
However, the CIPC disagreed and dismissed Nova’s response. It means Nova failed to convince the commission it is indeed complying with the financial reporting provisions of the act.
Cuma Zwane, an investigator for corporate disclosure and compliance regulation at the CIPC, confirmed to Moneyweb that the CIPC issued a CoR 139.1 compliance notice to Nova on October 25.
The CIPC does not issue many CoR 139.1 notices. In response to questions, the CIPC confirmed that on average, it only issues four to five such notices every month. Typical matters include the non-filing or late approval of annual financial statements, the non-disclosure of director remuneration, the failure by companies to conduct solvency and liquidity tests, and several other contraventions of the Companies Act.
“The notice was issued in terms of Section 171 (2) of the act, as a response to the board’s unsatisfactory response to our CoR.19.1. Upon receipt and evaluation of the board’s response to the compliance notice, either Section 22(3) or Section 171(6) of the act will be exercised,” said Zwane.
Nova now has a final opportunity to respond to the notice and convince the CIPC that it is complying with the Companies Act and is trading solvently and in accordance with the act.
If it fails to do so, the CIPC can issue a notice requiring the company “to cease carrying on its business or trading”.
The extent of the information the CIPC requires from Nova is not clear, although it relates to the possible contravention of Section 22 of the Companies Act. This section refers to several possible transgressions and prohibits a company from trading recklessly, negligently, fraudulently, or under insolvent circumstances.
Moneyweb has submitted a Promotion of Access to Information Act application to be given access to the actual compliance notice and related documentation, which would offer more detail.
However, the issuance of the CoR 139.1 notice is a significant development, as it effectively means that the CIPC can put Nova under administration, business rescue or even into liquidation.
In extreme cases, the CIPC may also refer the matter to the National Prosecuting Authority for criminal investigation.
Moneyweb sent questions related to the CoR 139.1 compliance notice and the lateness of the publication of the latest AFS to Haese, but she did not respond.